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reinvesting the money in the business. By the end of the 1992
fiscal year, they had invested $2,965,064 in the business.
From 1993 to 1996, however, the bonuses paid to Dennis and
Curtis left petitioner with either an operating loss or a nominal
profit. During the 4-year period from 1993 to 1996, shareholder
equity increased by only $168,813 (to $3,133,877 ending year
equity in 1996). Having reinvested profits from earlier years, a
hypothetical investor would have considered a return of $168,813
on the $2,965,064 investment to have been an unacceptable
performance.
An absence of profits paid to the stockholders as dividends
or reinvested in the business as retained profits justifies an
inference that some of the purported compensation really
represents a distribution of profits. Paying most of
petitioner's taxable income as compensation to its officers from
1993 to 1996 suggests that the distributions to Dennis and Curtis
were in part disguised dividends. See Owensby & Kritikos, Inc.
v. Commissioner, 819 F.2d at 1325. Although an independent
investor might have approved of the very large payments made to
Dennis and Curtis in 1993 and 1994 because of the exceptional
returns in prior years, we do not think such an investor would
forgo profits beyond that period. We think that an independent
investor would not have been satisfied with the large bonuses
petitioner paid to Dennis and Curtis in 1995 and 1996, since it
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